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Why do lenders do hard pulls?

Community Leader
Super Contributor

Why do lenders do hard pulls?

What advantage does a lender get from doing a hard pull that he would not get from doing a soft pull?

 

I ask because I have been increasingly struck over the last few years by the way the same action can cause either a hard pull or a soft pull, depending (it seems) purely on the lender.  Setting up electrical service at your new place?  That might be a hard pull or a soft pull -- I have experienced both and have heard other people say the same thing.  Getting cell phone service with a new company?  Same thing.  Renting an apartment?  Requesting a credit line increase on your credit card?  Applying for an SS personal loan?  In all of these cases you might get a hard pull or a soft pull, depending on the lender.

 

Thus it seems as though whether to make a pull hard or soft is in the hands of the lender -- possibly (though I don't know) for any consumer initiated action (requesting cell phone service, requesting a CLI, applying for a loan, etc.).

 

So what advantage does the lender/creditor get from making it a hard pull?  It seems like market forces would favor making it soft, since that will be much more likely to make a customer happy.  As far as I know (which is not much -- the reason I am asking you all) the hard pull doesn't cost the lender less or give the lender more data.  So what advantage does that lender get in that particular moment by making it hard?

 

Thanks in advance for any insight.

Message 1 of 19
18 REPLIES
Community Leader
Legendary Contributor

Re: Why do lenders do hard pulls?

The distinction between so-called "hard" and "soft" inquiries is purely an administrative conconction of the CRAs, and is not (except for promotional inquiries) covered under the FCRA.

FCRA 604 only defines what is or is not a permissible purpose for an inquiry.

The only type of inquiry that the FCRA states cannot appear in credit reports provided to others are the promotional inquiries under FCRA 604(c).

Theoretically, any other inquiry can be shown in reports provided to others.

 

When a creditor does a pull associated with requests for new credit, there are no published requirements for when they must be coded as hard or soft.

Theoretically, all inquiries based on a consumer request of credit can, and arguably should, be coded as hard.

Thus, any creditor can simply request a report, stating the permissible purpose as being a consumer intitiated request for credit, and that should become known to others.

The procedure and requirements for permitting a creditor to hide thwir inquiry from others, even though they can be included in credit reports provided to others, is not published by the CRAs, and is totally informal.

 

Why would a creditor do a hard pull?

Because they determine that it should become known to others, and not hidden.

Message 2 of 19
Community Leader
Super Contributor

Re: Why do lenders do hard pulls?


RobertEG wrote:
 

Why would a creditor do a hard pull?

Because they determine that it should become known to others, and not hidden.


Thanks Robert.  Right, a hard pull is visible to others.  So if the creditor has a strong desire for it to be visible to others, he'd make it hard.

 

But what I was getting it is "what is in it for him?" in that particular moment to want it to be visible to others,  It's important to remember that "others" means (most of the time) "other competitors."  When Chase makes a pull hard rather than soft, Chase is without a doubt helping Wells Fargo and Citibank and American Express and Quicken Loans and so on.  But he's doing so by risking making an existing or potential customer irritated with him (for damaging the customer's credit score).

 

What puzzles me is why a creditor would want in that particular moment to (a) help his competition and (b) risk injuring his relationship with a customer.  What makes some creditors want to do that at all?  And why is there such variance between some creditors doing it and others not -- often with the exact same kind of product or consumer initated request?

 

I appreciate very much the legal input surrounding the FCRA.  I guessed that there were no legal requirements that bound a creditor to make a pull either hard or soft -- but glad to hear that confirmed by you!

Message 3 of 19
Established Contributor

Re: Why do lenders do hard pulls?


CreditGuyInDixie wrote:

RobertEG wrote:
 

Why would a creditor do a hard pull?

Because they determine that it should become known to others, and not hidden.


Thanks Robert.  Right, a hard pull is visible to others.  So if the creditor has a strong desire for it to be visible to others, he'd make it hard.

 

But what I was getting it is "what is in it for him?" in that particular moment to want it to be visible to others,  It's important to remember that "others" means (most of the time) "other competitors."  When Chase makes a pull hard rather than soft, Chase is without a doubt helping Wells Fargo and Citibank and American Express and Quicken Loans and so on.  But he's doing so by risking making an existing or potential customer irritated with him (for damaging the customer's credit score).

 

What puzzles me is why a creditor would want in that particular moment to (a) help his competition and (b) risk injuring his relationship with a customer.  What makes some creditors want to do that at all?  And why is there such variance between some creditors doing it and others not -- often with the exact same kind of product or consumer initated request?

 

I appreciate very much the legal input surrounding the FCRA.  I guessed that there were no legal requirements that bound a creditor to make a pull either hard or soft -- but glad to hear that confirmed by you!


Think of it as Quid Pro Quo between lenders. Say I come to you and ask for a loan. Wouldn't you want to know if I had the ability to pay you back before you loaned me the money? I could tell you that my finances were all good when, in fact, they were not - thus, the reason for me wanting to borrow money from you in the first place. If you had the ability to check to see how many other people I had gone to to ask for money wouldn't you do the check? I know I would because I would want to be paid back. Hard pulls give the lender the ability to check to see how big a risk they are taking.

 

So, by helping his competition, he is also helping himself. By risking his relationship with a customer - real or potential - he is exposing himself to less risk in the long run by ensuring that he only loans money to those who have the appearance of being able to repay.

Over $192,000 in credit across 12 cards.

FICO ranges from 787 -820 as of 03/12/2018
Message 4 of 19
Community Leader
Legendary Contributor

Re: Why do lenders do hard pulls?

+1

You do it in the hopes that all will do it, thus giving all the benefit of that info if they want it.

Message 5 of 19
Community Leader
Super Contributor

Re: Why do lenders do hard pulls?

Hi Berk.  Yep, I totally understand why a lender might wish his competition had done all hard pulls.  It does indeed help him to have that info on all his competitors' actions (i.e. all of the requests made by the customer to his competitors).  So the section of your post where you are gently explaining to me why he might want that is definitely something I get.

 

But there is not in fact an agreement (a quid pro quo) between all lenders to do this -- there is widespread difference in fact on what they do.  Nor is there (as RobertEG observes) any legal requirement. 

 

Look at it this way.  Suppose we have a company that has a legal option to dump its exhaust into the air without scrubbing it.  Doing so will enable it to make more profits and charge its customers lower prices (making them happier).  Now you could say to the company (and its competitors) but see we all have to breathe that air, so in the long run it will benefit us all if we help each other out by installing scrubbers in our smokestacks.  Well yeah, but that doesn't change the fact that company X installing the scrubbers does not in fact induce company Y to do so.  Y can benefit from the cleaner air and still pollute.

 

In the absence of legal requirements or direct financial incentives, companies and individuals in a capitalist economy act in their own financial interest.  Indeed, the example I give above about exhaust is strikingly apt, since we have seen it play out over the last 40 years in our country.  Everyone has known for decades that the right thing to do is pay more money and buy a very low emission vehicle, so that we would all help each other out, but nobody did it (even though we all knew that if we did we'd be much better off).  Nobody, that is, until there began to be legal requirements to do so -- if your vehicle doesn't meet this level then you can't drive it.  Likewise we now also have direct financial incentives: get this car and we'll give you money back when you pay your taxes.

 

So I am trying to figure out what induces a company to want to anger a customer and help its competitors besides a generalized feeling of team spirit -- something I have never seen as an actual motivator in a capitalist economy..  That's why I asked what advantage the lender/creditor gets "in that particular moment."  He's not getting the advantage of complying with the law.  He's not getting the result of compliance with a contractual agreement he has with all or most creditors (an agreement that ensures they will also do hard pulls).  That's why I have been scratching my head and wondering what motivates some to do it while others do not.

Message 6 of 19
Established Contributor

Re: Why do lenders do hard pulls?

In the absence of legal requirements or direct financial incentives, companies and individuals in a capitalist economy act in their own financial interest

 

Exactly. And part of a bank's own financial interest is to ensure that 1) it gets a return on its investment, and 2) it keeps the government from interfering in their ability to conduct business via regulations. So, it is in the best interest of all banks (and their shareholders) to not engage in risky loans so that they can maximize their returns and not raise the alarm of the government. Look how the banks all banded together during the crash of 2008 - a crash that they created due to lack of government oversite and their own greed (and with little to no oversite to this day). And, while a few banks failed, for the vast majority of them it was business as usual. In fact, during the crash, Amex was reducing people's limits right and left and closing accounts with no warning. Many of these were business customers who had been customers for years with Amex and had not the first late payment let alone a missed one. Many went out of business because suddenly their cash flow changed literally overnight. Amex acted in its own financial interest and it didn't care how many honest people it put out of business to do so. There was not government regulation telling them that they couldn't. After all, it was their money. Talk about angering customers.

 

Remember when the tobacco compaines were getting sued? How in the world did they have all that available cash to pay out the huge verdicts? Its because back in the 40s and 50s they assumed that one day they would get sued because they knew that the product they were making was bad for people. So, competitors joined together, invested money, and created a huge trust that the manufacturers could then draw from to pay these huge settlements so that they wouldn't go bankrupt when the lawsuits started rolling in. It was all about financial interest. All the companies knew that individually they would more likely than not all be doomed. Together, they all could weather the storm. 

 

Look at "Citizens for Fire Safety." Sounds like a good, safe organization, right? One that is looking out for the best interest of you and your family. In fact, it was a trade organization made up of chemical companies that were in direct competition with each other. These companies made highly toxic fire retardent chemicals that were used in the manufacture of furniture. They all banned together to try to convince you and me that we couldn't live without fire retardant furniture while not telling us that we would die of cancer. They wanted to keep making a ton of money by selling toxic chemicals and didn't care how many people they killed doing it. They knew that if one company's chemical was banned, then everyone's would be. They joined together, not to sit around and chant "Give me an "S", give me a "P", give me an "I". No, they banned together to make even more money. In fact, they were in leauge with Big Tobacco who didn't want to have to make a self extinguishing cigarette 9it would cost more money to manufacture with no way to pass the cost on to the consumer) but wanted to convince Congress that the real danger lay in burning furniture - never mind that it was a lit cigarette that caused the furniture to burn in the first place. 

 

It is far from a "generalized feeling of team spirit" and all about the dollar. By helping each other out, banks are putting more money in their own pocket. And believe me, they all have way too many customers to care about the few that get irritated due to hard pulls and the even fewer who just up and leave because a lender had the audacity to perform a hard pull credit check.

 

As to why some do and some don't when it comes to cell phones, utilities, cable, even some loans - who knows? All I know is that the vast majority of lenders do hard pulls when they check your credit. And they do it because ultimately it affects their bottom line.

 

And its time for me to go have a smoke. But not on my couch.

Over $192,000 in credit across 12 cards.

FICO ranges from 787 -820 as of 03/12/2018
Message 7 of 19
Community Leader
Super Contributor

Re: Why do lenders do hard pulls?

Enjoy your smoke.  :-)

 

Bear in mind that it is also credit limit increases that there is a wide range of diverse behavior on, including diversity between the big CC issuers and banks.  It's not so that there there is monolithic agreement between all the big companies on making all of their credit checks hard. 

 

And you may be trivializing the extent that CC companies are in serious competition with each other as they attempt to woo customers over to their company.  As a mattter of fact, I wonder whether the extent to which more and more SP options for CLIs have become available in the last several years isn't precisely the result of CC companies taking seriously the dissastisfaction a CLI hard pull can cause. 

 

I do agree that there's no question that credit cards, mortgage loans, car loans, etc. seem to almost universally involve hard pulls (the curious exception being secured personal loans, with some lenders like Alliant doing soft pulls only and some others doing hard pulls).  I even agree that with big lenders (Chase, Wells F, BOA, etc.) one can imagine an unofficial smoking-room conspiracy to agree never to use soft pulls on certain products, since if Chase stopped doing them then might lead to other big lenders following suit, which would not be in Chase's interest, since Chase (etc.) want to see the other's pulls.  But the same logic doesn't follow for little lenders, or even more strikingly a single landlord.  Their failure to do hard pulls won't affect the decision of everybody else to do them -- thus they'd still benefit from all their competitors' data.  So I wonder whether there might be some other kind of motivation or influence that is going on in their case, outside of human cussedness.

 

I had wondered whether the FCRA might not require that all of the big apps (CCs, many loans, etc.) be hard, but RobertEG shot possibility down and he's our expert on the FCRA.

Message 8 of 19
Established Member

Re: Why do lenders do hard pulls?

Creditors are acting in their own best long-term interest in generally keeping the integrity of the FICO system which has served them well over the years. They do not want to invalidate a scoring element that FICO deems important in predicting risk. In this particular scenario there is no good ending for creditors acting in short-term at the expense of long-term interest. 

 

What is overlooked in this discussion is an assumption that hard pulls and soft pulls yield the same information to the creditor. I have heard from a credible source--someone who pulls scores all day long--that "soft pulls show the creditor whatever they want to pay." Seemingly, creditors pay somewhat less for soft pulls and get less data but the details of that remain fuzzy.

 

Creditors also have other motives for soft vs hard pulls. Many credit unions use pulls for marketing purposes. You may sign up for just a savings account, but the CU would like to entice you with other products immediately if you meet their criteria. The specific details of what they want to see in your credit report may determine soft vs hard pull.

 

Regarding utilities, I have seen a change in their behavior over the years. Many years ago, I had Direct TV and there was no hard pull. Now, there is. When I had Verizon FIOS installed there was a hard pull. They justify the hard pulls by saying that they are leasing valuable equipment to you and need credit information. Often you can get the HP waved if you put up a deposit. Utilities are the hardest to predict, and do seem arbitrary, I'll admit.

 

 

FICO 08 MyFico

Equifax 850 Mar 2017
TransUnion 847 Mar 2017
Experian 847 Mar 2017
Message 9 of 19
Community Leader
Super Contributor

Re: Why do lenders do hard pulls?

Hi Whitebird.  I agree that a key question is whether "the hard pull costs the lender less or give the lender more data."  (slight paraphrase to the text from my first post)

 

(1)  If hard pulls were cheaper, then that would of course explain the preference.

 

(2)  Or if hard pulls gave the creditor more data than a soft pull ever could, that would also explain it.

 

So the thread starts with the tentative assumption that neither of those is true -- but it also invites anyone who can correct us to chime in.  Regarding the first, I don't think you are suggesting that hard pulls are cheaper, but let me know if you are. 

 

For the second, what your friend is likely getting at is that there are different kinds of soft pulls, some of which do give less data than a hard pull.  For example, one can do a soft pull solely for identity proofing -- to help establish that a person is who they say they are.  Such a soft pull would likely not give all the details about a person's accounts.  I can certainly imagine that such a soft pull would be cheaper than a hard pull.

 

But we are not talking about that particular sub-class class of soft pulls.  Here we are talking about a soft pull that gives the lender/creditor all the data he'd get in a hard pull: all the accounts, amounts owed, all derogs, etc.  If your friend is suggesting that such soft pulls do not exist -- that a hard pull always gives crucial data for the assessment of credit risk  that a soft pull would not and cannot -- let me know.  Again, that would absolutely explain the preference for hard pulls.

Message 10 of 19